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Neil v. Zell

November 9, 2010


The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer


Plaintiffs, participants in Tribune Company's Employee Stock Ownership Plan ("ESOP"), seek partial summary judgment on one of their claims against Defendant GreatBanc, the plan's fiduciary. In its earlier ruling on a motion by all Defendants for dismissal, the court concluded that Plaintiffs had successfully stated a claim that GreatBanc violated its fiduciary duty when it approved a stock purchase by the ESOP that was a prohibited transaction. Plaintiffs now move for summary judgment on that portion of their claim alleging that GreatBanc engaged in a prohibited transaction. For the reasons that follow, Plaintiffs' motion is granted.


The court's earlier order contains a detailed description of the transactions that transformed Tribune from a publicly traded company to a private employee-owned one that is now in bankruptcy. Neil v. Zell, 677 F. Supp. 2d 1010, 1015-18 (N.D. Ill. 2009). The transaction at issue in Plaintiffs' motion is the ESOP's purchase from Tribune on April 1, 2007 of 8,928,571 newly issued unregistered shares of Tribune for $28 per share. (Pls' 56.1(a)(3) Statement ¶ 11.) In exchange for the shares, the ESOP gave Tribune a promissory note in the principal amount of $250 million to be paid over 30 years. (Def's 56.1(b)(3)(C) ¶ 11.) In addition to being unregistered, the shares were subject to a trading limitation. In approving this purchase, GreatBanc agreed that the shares would be transferable only pursuant to a public offering registered under the Securities Act of 1933, under Rule 144 or 144A of the Securities and Exchange Commission, or some other, unspecified, legally available means of transfer. (ESOP Purchase Agreement, GreatBanc's Ex. B § 7(a).) More than 240 million shares of Tribune stock were available for public trade on the New York Stock Exchange at the time of the transfer, but starting April 25, 2007, Tribune began a tender offer to repurchase up to 126 million publicly traded shares. (Pls' 56.1(a)(3) Statement ¶¶ 13-14.) Following the stock repurchase, Tribune merged with the ESOP and all Tribune shares not held by the ESOP were retired or cancelled, making the ESOP Tribune's sole shareholder. (Def's 56.1(C) ¶¶ 18, 33, 36, 38.)

Plaintiffs' complaint includes several allegations against Defendant GreatBanc and against Defendants Samuel Zell and EGI-TRB, but their current motion for summary judgment is addressed only to their claim that by agreeing to the initial transfer of stock to the ESOP, GreatBanc violated its fiduciary duties.


Summary judgment should be granted when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(c). "On a motion for summary judgment, the district court must construe all facts and draw all reasonable inferences in favor of the non-movant." Srail v. Village of Lisle, 588 F.3d 940, 948 (7th Cir. 2009).

I. ERISA § 408(e) Incorporates IRC § 409(l)

As the court explained in its earlier order, ESOPs are exempt from ERISA's bar on the purchase of employer stock so long as the purchase meets certain requirements. Neil, 677 F. Supp. 2d at 1025. One of those requirements is that the company stock purchased must satisfy the Tax Code's definition of "qualifying employer securities." That is, it must be "common stock issued by the employer . . . which is readily tradable on an established securities market." IRC 409(l), 26 U.S.C. § 409(l). The application of the Tax Code's definition is required by a complicated set of cross-references that begins with the ERISA provision setting forth the requirements for a plan to qualify for the exception from the ban on purchasing employer stock:

Under ERISA § 408(e), 29 U.S.C. § 1108(e), to qualify for the exception, the plan must pay adequate compensation, and it must be an eligible individual account plan as defined in ERISA § 407(d)(3), 29 U.S.C. § 1107(d)(3). One such eligible individual account plan is an ESOP, which is defined in the same section as an "individual account plan-(A) which is a stock bonus plan which is qualified, or a stock bonus plan and money purchase plan both of which are qualified, under section 401 of Title 26, and which is designed to invest primarily in qualifying employer securities, and (B) which meets such other requirements as the Secretary of the Treasury may prescribe by regulation." ERISA § 407(d)(6), 29 U.S.C. § 1107(d)(6) (emphasis added). Those other requirements are found at 29 C.F.R. § 2550.407d-6, but subsection (c) of that regulation requires an ESOP to meet yet more requirements that the Treasury Secretary can prescribe under certain Internal Revenue Code provisions. See IRC § 4975(e)(7)(B), 26 U.S.C. § 4975(e)(7)(B). Those other requirements are listed at 26 C.F.R. § 54.4975-11, which lists conditions for an ESOP including satisfying IRC § 4975(e)(7)(A), 26 U.S.C. § 4975(e)(7)(A). That subsection requires the plan to qualify under IRC § 409(l), 26 U.S.C. § 409(l), which mandates that the securities purchased by an ESOP be "common stock issued by the employer . . . which is readily tradable on an established securities market." Id. § 409(l)(1).

Neil, 677 F. Supp. 2d at 1026-27. GreatBanc, without acknowledging that the court has already ruled on the matter, takes issue with the court's stroll along this admittedly confusing path.

First, GreatBanc argues against the court's reading of 26 C.F.R. § 54.4975-11, a provision containing requirements that the Secretary of the Treasury has prescribed for a plan to constitute an ESOP. (GreatBanc's Br., at 12-13.) According to GreatBanc, that provision does not address the requirement that an ESOP purchase "employer securities" or "qualifying employer securities." (Id.) GreatBanc is correct that the section itself does not address the requirement. As the court explained earlier, however, that section incorporates a provision of the Tax Code, which itself incorporates another provision of the Tax Code that does indeed discuss "employer securities" and "qualifying employer securities." Section 54.4975-11 states that to be an ESOP, "a plan described in section 4975(e)(7)(A) must meet the requirements of this section." The referenced section is IRC § 4975(e)(7)(A), 26 U.S.C. § 4975(e)(7)(A), which states that an ESOP must be "designed to invest primarily in qualifying employer securities." A definition of "qualifying employer securities" is found within the same section of the Tax Code. IRC § 4975(e)(8), 26 U.S.C. § 4975(e)(8). The court did not explicitly mention the connection to IRC § 4975(e)(8) in its earlier order, and GreatBanc now argues against that connection, suggesting that because § 54.4975-11 mentions § 4975(e)(7) but not § 4975(e)(8), the regulation does not incorporate § 4975(e)(8)'s definition of "qualifying employer securities." (GreatBanc's Br., at 13.) The court concludes that argument must be rejected because it is impossible to read § 4975(e)(7) without incorporating the definition of one of its terms that is found in the same statutory subsection. As Plaintiffs note, sections of the Tax Code that refer to terms outside of the Tax Code do so explicitly. E.g., IRC § 4975(e)(3)(C), 26 U.S.C. § 4975(e)(3)(C) (referencing ERISA's definition of "fiduciary"); IRC § 4975(d)(16)(A), 26 U.S.C. § 4975(d)(16)(A) (referencing Federal Deposit Insurance Act's definition of "depository institution holding company").

Thus, the court stands by its determination that 26 C.F.R. § 54.4975-11 requires an ESOP to be designed to invest primarily in "qualifying employer securities," as that term is defined in IRC § 4975(e)(8), 26 U.S.C. § 4975(e)(8). That section defines "qualifying employer securities" to mean "any employer security within the meaning of Section 409(l)." Finally, IRC § 409(l)(1), 26 U.S.C. § 409(l)(1), provides the following general definition for "employer securities": "common stock issued by the employer . . . which is readily tradable on an established securities market."

In another challenge to the court's interpretation of § 54.4975-1, GreatBanc urges that the provision is meant to impose "other requirements" onto ERISA, not to override requirements already established by ERISA. (GreatBanc's Br., at 12-13.) ERISA's definition of "qualifying employer securities" is found in ERISA § 407(d)(5), 29 U.S.C. § 1107(d)(5), and includes "stock" without any qualifications. GreatBanc asserts that it would not make sense for Congress to refer to Treasury Department regulations that create other requirements to reinterpret ERISA's existing definition of "qualifying employer securities." Congress did not in fact specifically refer to Treasury Department regulations, however. Instead, in ERISA § 407(d)(6), 29 U.S.C. § 1107(d)(6), Congress gave the Secretary of the Treasury the power to promulgate regulations supplementing the statutory requirements for ESOPs. One could argue that it would not be sensible for Congress to adopt different definitions of "qualifying employer securities" in ERISA and in the Tax Code. The regulation at issue thus serves the purpose, albeit in a less than direct manner, of repairing that inconsistency by applying the Tax Code's definition onto ERISA. The court therefore disagrees with GreatBanc's assertion that the court has created a conflict between the different definitions. (GreatBanc's Br., at 13.) On the ...

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